Langton Capital – 2020-02-18 – PREMIUM – Intercon, branding, scalability, confidence etc.
Intercon, branding, scalability, confidence etc.
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A DAY IN THE LIFE:
So, after storms Ciara and Dennis, the drying out exercise has commenced for most of us but, as all that water in the gardens and fields has to go somewhere, it could be a bit of an issue for those people living downstream.
Hence what’s a relief for York, for example, could be a bit of an issue for Selby and, after all of this, what we don’t want to hear is that the reservoirs are still empty.
A bit pressed this morning so, with the number of out-of-office replies firmly pointing to the fact that it’s half-term out there, let’s move on to the news:
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SMALL CAN BE BEAUTIFUL: We’re exaggerating to make a point here but if a restaurant works, a PE house may say ‘build me a thousand’ – but is that a good idea? 18 Feb 2020:
• We believe it was legendary Fidelity fund manager Peter Lynch, in his book One up on Wall Street, who said that one of the beautiful things about spotting a winner in the F&B industry in the US was that it could take the chain 25yrs or more to roll out from Florida to Oregon or vice versa.
• Having a reliable playbook like that, even if it was more aspirational than actual, must have been rather reassuring
• Writing before the Internet speeded things up, Mr Lynch maintained that operators had time, the country was simply so physically large, and there was a degree of homogeneity such that, if a unit worked in Springfield, Florida, then it should also work well in Springfield, Arkansas, Colorado and California .
The Holy Grail…
• Here in the UK, if something works, there is also a temptation to do more of it.
• But the UK market is relatively small and surprisingly diverse.
• Frankie & Benny’s is perhaps a prominent example of a brand that was rolled to aggressively.
• The prior (but one) management rolled out Frankie’s to nearly 300 sites and, when momentum stalled, it introduced what might be unkindly deemed a me-too brand, Coast to Coast
• Subsequent managements have closed and disposed of some sites with more conversions into Wagamama’s to follow.
• We would suggest that this is sensible but finite and, even an interesting brand such as Wagamama, could quite easily be rolled too far.
• Whilst they are still gently expanding, the fact that the market is finite must have occurred to winners such as Nando’s, McDonald’s, Gregg’s etc.
The economic rationale for growth:
• There are clear synergy benefits re costs including more efficient marketing spend, better labour sourcing etc. to be had via scale.
• Different brands don’t have to be explained and the cookie-cutter approach to roll-out is efficient in terms of capital spend etc. (although complacency may become a risk if the same floorplan & suppliers etc are used.)
But declining returns can be a feature:
• However, there may be a trade-off between the advantages of branding (customers know and trust the product, the units get a brand-boost on opening etc.) and the feeling that the units are somehow no longer ‘special’
• This is less of an issue for pitstop venues such as McDonald’s or Gregg’s. But it is an issue for ‘special event’ venues.
• And one size doesn’t always fit all. Frankie and Benny’s over-expanded and then arguably attempted a brand-extension via Coast to Coast.
• Overexpansion at some point could be an issue for Domino’s where the group has several times set and exceeded target numbers for the maximum it believed could be operated in the UK.
The problems associated with small chains:
• Hence, in a perfect world, it may be ideal to have a dozen or more chains of 20-50 units each rather than a chain of 500 units operating under one brand
• But the large number of spinning plates require managing and, not to put too fine a point on it, the egos involved could be quite challenging
• Nonetheless, the issues faced by full service restaurants such as Frankie & Benny’s (versus the ‘easier’ scalability of Grab n Go such as McDonald’s or Gregg’s or the limited service units such as Nando’s) does seem consistent with the suggestion that there is a cap when it comes to growth
PUBS & RESTAURANTS:
• The Food and Drink Federation has published its 2019 Business Confidence report showing that the sector reported improved optimism in Q4. The survey shows that net ‘confidence in the industry has improved by 29 percentage points since Q1 2019, although it remains negative overall.’
• The FDF says ‘larger businesses are more optimistic about the year ahead for the UK economy than SMEs.’ CEO Ian Wright says ‘it’s no surprise that the industry remains troubled following a period of sustained uncertainty, with our future relationship with the EU still unresolved. But our industry is phenomenally resilient.’ He says that ‘it is essential that we minimise friction in whatever way possible, while maintaining high standards for UK food and drink.’
• Low and no-alcohol products on a roll but some suppliers are potentially ill-prepared re quality of the product etc.
• Distil Ventures has suggested that some drinks manufacturers are ‘cutting corners’ when it comes to safeguarding the quality of zero-alcohol drinks. Nielsen recently said that LfL sales of low- and non-alcoholic alternatives in the UK rose 25 per cent to £116.6m in the year to June 15.
• JD Wetherspoon has announced it will begin to serve ‘ethical’ fair-trade sugar at all its venues.
• Puttshack, the indoor mini golf concept, has continued its US expansion with a further two leases for sites in Chicago and Miami being signed. Joe Vrankin, CEO of Puttshack, said: ‘Given Puttshack’s global headquarters are based here in the US, the expansion into the market was a natural fit. Chicago is exciting as it is the birthplace of Puttshack -with our global head office based in the city’.
• Restaurants and hotels are stocking up on cleaning products as concerns grow over the spread of coronavirus.
• Biffa, the UK based sustainable waste management company, has signed a new three-year waste management contract with M&B.
• The Famous Grouse has overtaken Jack Daniel’s as the UK’s best-selling whiskey over Christmas reports Nielsen. It says that the new brand leader enjoyed “outstanding” sales growth in the UK off-trade in the 12 weeks to January 2020. It says sales values were up 2.6% to around £71 million.
• The US government has said that current tariffs on still wines made in France, Germany, Spain and the UK, as well as Scotch whisky, will remain in place, but that duties will not be raised to 100%. The current 25% tariffs were put in place in October last year.
• The independent pub company, Punch Pubs & Co has acquired the Dog House pub in the centre of Norwich.
• Aldi has increased the price of plastic bags to 15p from 9p in a bid to reduce their unnecessary usage.
• US-based cannabis ‘lifestyle brand’ Kona Gold Solutions has acquired Flo Beverages.
• Shoe Zone has warned that it could close up to 100 of its stores unless business rates are overhauled.
• There are reports that some retail parks and supermarkets are hiring third parties to ‘monetise’ their carparks via levying fines on customers for overstaying. This would seem to be an action more likely than not to drive what customers the outlets have left to the online retailers.
• China is to begin importing live chicken from the US following shortages caused by the outbreak of coronavirus. This is likely to push the global price of chicken up in the coming months.
• Amazon founder, Jeff Bezos has donated $10bn to fighting climate change.
• Data from GMB union has found that hundreds of people have been seriously injured in Amazon’s UK warehouses over the last three years.
HOLIDAYS & LEISURE TRAVEL:
• Intercontinental Hotels Group has reported full year numbers to end-December saying that revenue rose on an underlying basis by 6% to $2.08bn (up 8% on a reported basis), with operating profit up an underlying 6% at $865m.
• IHG says that it grew its estate by 5.6% last year (by 5.0% excluding Sands partnership in Macau SAR), which it says was ‘the strongest in over a decade, with 65k room additions.’
• The company says its ‘ongoing focus on the long-term health of established brands drove 18k removals, leaving 884k rooms across the global estate.’
• IHG’s global REVPAR fell by 0.3%. It says this was down by 0.1% in the Americas but down by 4.5% in Greater China. The company says room signings amounted to 98k rooms in the year.
• IHG’s CEO Keith Barr reports ‘our performance in 2019 reflects the continued successful execution of our strategy, with the investments we’re making in our brands, owner offer and enterprise capabilities accelerating net room openings and supporting sustainable long-term growth. These investments are being funded by our group-wide efficiency programme, which is on track to deliver $125m of annual savings, with the majority already realised and being reinvested across the business.’
• Mr Barr says ‘during the year we grew our estate by 5.6%, our highest rate in more than a decade, which helped deliver a 6% increase in underlying operating profit in a weaker RevPAR environment. We increased our ordinary dividend by 10%, and remain committed to returning surplus cash to our shareholders.’
• Regarding the outlook, Mr Barr says ‘the fundamentals of our industry remain strong, and our cash-generative, resilient fee-based model, underpinned by a commitment to operate a responsible business, gives us confidence to continue making the strategic investments that will drive our long-term growth.’
• Regarding the coronavirus outbreak, IHG says ‘given the ongoing impact of coronavirus following the outbreak in China, our top priority remains the health and safety of our colleagues, guests and our partners on the ground, and we are doing all we can to support them at this difficult time.’ The group does not give any indication as to the financial impact.
• Looking at IHG’s sectoral performance, EMEAA saw REVPAR up by 0.4%. It says continental European REVPAR was some 3% higher. It says ‘trading conditions in the UK were increasingly challenging through the second half of the year.’
• The European Travel Commission (ETC) reports a 4% rise in international tourist arrivals to Europe in 2019. Turkey saw international visitors up 14%, with Portugal up 7% and Montenegro up 21%. The traditional markets in the western Mediterranean performed less well.
• Egypt has once again become an emerging destination following the lifting of UK flight restrictions to Sharm el Shiekh, according to booking data from Classic Collection Holidays.
• Japanese officials have confirmed 99 more people infected by the new virus aboard the quarantined cruise ship Diamond Princess, bringing the total to 454, the Health Ministry said Monday.
• Parkdean Resorts has announced it will trial its ‘parks of the future’ project as part of a £80m investment.
• Silver lining to the weather? Indoor attractions should have performed well over the last couple of weekends. Langton couldn’t get into the cinema on Sunday, for example.
• Manchester City has lined up a legal defence against its Champions League ban. A spokesperson for the club mentioned: ‘This is not about getting a smaller punishment. This is about the substance of the case, which will finally be heard freshly by an independent group where we believe we will prevail’.
• Apple has stated that disruption caused by the coronavirus in China will mean revenues will decline.
FINANCE & ECONOMICS:
• The FT suggests that a new date for the Budget, the first since October 2018, will be announced later this week.
• Speculation is mounting that new Chancellor Rishi Sunak will bow to pressure from number 10, turn on the spending taps and potentially breach manifesto promises regarding the government’s self-imposed fiscal rules.
• Sterling down a bit at $1.2996 and €1.1996. Oil lower at $57.10. UK 10yr gilt yield up 1bp at 0.64%. World markets better in the UK & Europe yesterday, mixed in the US but lower in the Far East in Tuesday trade.
• Brexit & politics:
o UK Brexit negotiator David Frost has said at the Universite Libre de Bruxelles that Britain will not sign up to follow EU standards because it would defeat the point of Brexit. The EU’s negotiator Michel Barnier has said that, unless this happens, free trade may not be possible to deliver,.
START THE DAY WITH A SONG:
Yesterday’s song was Summer of ‘69 by Bryan Adams. Today who sang:
Means what you think you saw, you did not see
So don’t blink be what was there is now gone
Black suit with the black Ray-Bans on
RETAIL WITH NICK BUBB:
• Weather Watch: The wet weather since Christmas has claimed its first Retail victim, in the form of a profit warning today from Angling Direct (“the largest specialist fishing tackle and equipment retailer in the UK”), which has a market cap of £44m. In its pre-close update, for y/e Jan, the company has warned of a disappointing trading period since Christmas, influenced by “exceptional winter flooding” and “lower levels of fishing activity”.
• News Flow This Week: At lunchtime the weak Asda calendar Q4 results will be out, on the back of the WalMart final results in the US (for y/e Jan). The Laura Ashley interims are on Thursday, along with the ONS Retail Sales figures for January.